How Chapter 7 and 13 Affect Your Credit Differently and Which Rebuilds Your Score Faster Skip to main content

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How Chapter 7 and 13 Affect Your Credit Differently and Which Rebuilds Your Score Faster


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How Chapter 13 and Chapter 7 affect your credit differently

Image source: Flickr Creative Commons User Simon Cunningham

For those deep in debt and looking for meaningful debt relief, both Chapter 13 and Chapter 7 can be great choices to shed bills you can't afford to pay. But there are big differences in how these options affect your credit and how quickly you can rebuild your credit after filing. With either bankruptcy option, your credit will take a hit. But let's be real. If you're struggling to pay your bills, your credit rating is probably already taking a beating so filing for debt relief can stop the FICO hemorrhage and allow you to start rebuilding, but which option is better for you?

Chapter 13 May Be Harder on Your Credit

Filing either Chapter 7 or 13 will cause an immediate hit on your credit report that can represent as much as a 100 point drop. That's a big hit, but it's recoverable. However, with a Chapter 13, it will take much longer – here's why. Because in a Chapter 13 you are continuing to pay your creditors, even if it's only a little, many will keep posting to your credit report that you are late and/or not paying the full amount. This is not how it's supposed to go.

In 2009, reporting standards changed and the credit bureaus told credit card companies that they should reduce the amount owed to what the bankruptcy court has allowed and stop reporting you as past due. Despite the rule change based on a court ruling, roughly half of creditors continue to break the rules and report you as late. This is not okay, and you can fight it, but it will take effort and may even take legal assistance to get it straight.

And if you can't complete your Chapter 13 repayment plan, even if your creditors were following guidelines and properly reporting reduced balances, this will come crashing down around you and they can revert back to showing you as past due with significant balances due and negative items showing. Chapter 13 falls off your credit report after seven years from the filing date.

Chapter 7 Should Be Easier on Your Credit

Even though you're not paying as many of your bills as you are under a Chapter 13, the impact to your credit score may be less and it may be easier to bring your credit score back up. On average, within 12-15 months of filing a Chapter 7, your score should be higher than it was prior to filing bankruptcy. Once you get your discharge, if you get busy trying to improve your score, it can get better faster.

Stating with a secured card and then a lower limit unsecured card, you can rebuild your credit. You should pay the balances in full each month. And, paying all of your bills on time from the moment you file bankruptcy is also critically important to re-establishing credit. Although the bankruptcy itself will stay on your credit report for 10 years from the date of filing, your other accounts will fall off after seven years. Be sure to check your credit report within a few months after filing bankruptcy of either type to ensure your accounts are properly reflected.

If you're neck deep in debt and struggling to get by, contact the law offices of John T Orcutt to find out how a North Carolina bankruptcy can helo you get the debt relief you deserve. Always a free consultation!

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